Exploring the options available to UK companies needing to refinance
Whilst government support has been helpful and likely kept many thousands of businesses afloat during the coronavirus crisis, it has burdened those businesses with debt that, even if it can be financed cheaply, will still have to be repaid.
UK companies have so far borrowed more than £73 billion under government-backed emergency loan schemes, and they will have borrowed more through other facilities made by banks and other lenders. Many of those companies, particularly SMEs, will struggle to repay their debts. Indeed, the National Audit Office (NAO) predicts that up to 60% of the Bounce Back loans made to SMEs will likely never be repaid, meaning up to £27 billion could be lost in defaults.
As a result, refinancing will be of utmost importance for many businesses: companies need to investigate and identify the best option for their individual circumstances in order to alleviate the risk of defaulting on outstanding debts and reduce the corresponding negative impact on the economy.
Number of refinancing paths available
The most obvious way in which companies can reduce their risks of defaulting is by talking to their creditors in order to renegotiate the terms of their facilities. The starting point should be the maturity profile of debts. This is as important as the amount outstanding and can have the most immediate impact on the sustainability of a business.
In the last 12 months, forbearance has been readily granted by lenders to businesses that have been proactive in their dialogues. Although they aren’t lenders – and shouldn’t be considered as such – HMRC and landlords are other creditors that businesses should consider approaching if they are struggling with outstanding debt burdens. HMRC in particular has been making efforts to be accommodating in the circumstances of the pandemic.
The general principle to follow is that creditors will show flexibility in proportion to the efforts made by borrowers. These could include small ad hoc payments that reduce arrears or the raising of equity capital or the provision of security to support a creditor’s position.
More comprehensive debt restructurings, such as a switch to amortising funding, can be achieved by raising replacement funding via FinTech platforms or the issue of medium term notes (MTNs), which is a form of financing in which LGB specialises. Private investors and investment funds providing loans through these channels welcome regular cash flows and can therefore accept tailored loan repayments. Banks, which generally match fund loan books, are less flexible.
Historic debt burden for UK companies
UK corporate debt had continued to rise in the years prior to the Covid crisis, and increased by £70.8 billion in H120. Although the rate at which companies are issuing debt is likely to be declining, UK companies may well have accrued over £100 billion of extra debt once the pandemic is over.
These figures suggest that, in a low-interest environment, companies have become over-reliant on debt capital. While replacing debt with equity is an obvious answer, a more fundamental approach would be to restructure businesses in order to release capital to repay debts.
One innovative approach is to consider whether technology, such as that supporting video meetings, now enables business functions to be conducted in partnership with other parties rather than exclusively in-house. These could include product development, sales in particular market segments and customer servicing. It could often be better to give up a portion of revenues in order to reduce overheads and capital employed. Such decisions should be based on an analysis of the contribution to overheads provided by a company’s various activities. Besides freeing up capital, streamlining in-house activities can also reduce complexity in a business and thus spur growth in core areas.
LGB, a capital markets and investment firm, deployed this tactic in response to the pandemic. We arranged for our corporate advisory team to transfer to a specialist advisory firm called Smith Square Partners under the terms of a Strategic Alliance. Our colleagues joined a business with a greater critical mass of advisory projects, while those of us who remained were able to focus on our core business of capital raising and investments. The move allowed us to reduce our overheads by 30% as the restructuring included an office move. We can still provide advisory services to our corporate clients in conjunction with Smith Square while benefiting from the introduction by our new partners of prospective capital-raising and investing clients.
In conclusion, as we emerge from the pandemic debt burdens will remain challenging. Strong lines of communication with creditors and some creative thinking will be well rewarded.
If you would like to talk about our MTN programmes or other funding solutions, please get in touch.